Is Your 401k Dying?

Check this out:

As the economy worsens, a growing number of small businesses are suspending their 401(k) match, and, in some instances, closing the retirement plans altogether.

While only about 15% to 20% of small businesses offer a 401(k) plan, many added them in recent years to attract and retain workers and to help business owners save for retirement. But the economic downturn and higher health-insurance costs are forcing companies to cut back on retirement benefits.

"It's a cash-flow issue," says Patrick M. Shelton, a partner at Benefit Plans Plus LLC, a third-party administrator of retirement plans in St. Louis. "The companies don't have money to meet payroll and medical insurance, so they're cutting back on 401(k) plans."

Yikes! Anyone out there have this going on with their company?

I work for a small company and our business is booming now, so we're full-speed ahead on everything -- and our 401k isn't changing a bit.

For those of you that do have a change, you may need to consider other job opportunities. Not that you should quit right away (especially in this economy), but if the company is that bad off from a cash flow perspective, it could be on the brink of going under. It wouldn't hurt to keep your options open.

Comments

[Stephen]

I've never been a fan of how my company handles their 401k and the company match. It's a "discretionary" match every year, so if they want, they can just say "no match this year" and there's nothing we can do about it. For instance, last year, they said "25% match up to 6% for everyone who worked over 1000 hours", which eliminated the 30 of us who were hired mid-year (I had worked 990 hours and got no 401k match).

I'm used to getting screwed by my company. It's what I've come to expect, and that was in the "good times".

[Foobarista]

I've never had a company match - Silicon Valley startups tend not to do them. The main use of the 401K is the tax deferral, so I still load it up as long as I have an index fund to put it in.

An aside: I got hugely lucky this year in that I lost my job this summer and rolled over my 401K. It took awhile to get the rollover cash as the company had imploded completely, and I wanted to revisit my investments, so I left it in cash while I did the research once I did get it. Meanwhile, the crash started...

That probably saved me about $100K.

Now, the question is when to buy back in. Now, the big worry is that particular stocks may actually go to zero, so I'll probably buy index funds as I'm not the sort who has time to canvass the market and do deep research.

As for the work situation, I did find a new job fairly quickly. It was probably good that the company didn't wait another couple of months to wind things up..

[Bill Schitter]

I don't know about small companies, but DuPont began matching 100% up to 6% of employee contributions, PLUS adds 3% of all monthly compensation to our 401k, for a total of 9% company contribution. However, existing employee pensions will no longer receive increases, and new employees will not be getting a pension at all. New employees will be enrolled in 401k automatically and 3% of their total compensation will be deposited in the account on a monthly basis.

[rwh]

If this spreads to larger companies I can foresee it becoming a big public policy issue. Lots of financial commentators are now concluding the 401k and similar defined contribution plans will result in a poorer retirement for millions of workers now in their 50s and older, compared to the previous generation of workers that were more likely to have tradtional pensions. This means the baby boomers, and we all know the boomers (I'm one) will not go quietly into the night. We'll think nothing of running up more debt for our grand kids in order to have a more secure retirement.

On a related note, my wife and I started Roth IRAs in 2001 and 2002. My wife is in the Vanguard Wellington Fund (approx a 60/40 stock/bond allocation) and mine is in the Vanguard Wellesley Fund (approx a 40/60 allocation). We started with the minimum of $1000 to start with $100/month and gradually increased that to the current $300/month. As of this month, the Wellington Fund is now worth about $200 less than the sum of all contributions and dividends, while the Wellesley Fund is now worth about $200 more. So, after 7 years of regular investment, we are dead even. But on the bright side, the price of gas is about the same now as then:)

[Margo]

When I started in '04, my company plan was:
3% into a defined contribution plan. It scaled up according to Age+Years of Service, to as much as 12% -AND-
50 cents on the dollar up to 6% in 401k

Starting in 2009 it will be:
dollar for dollar up to 6% in 401k

The $ difference is a wash to me, but for many older, tenured workers that is a raw deal. Only if your age + years of service was something like 60+ would they give an additional 2-3% and only for 5 years.

I think they are banking on the fact that many employees can't afford to start their 401ks in this climate and that others will lower or eliminate their contributions to make up for the higher insurance premiums and copays we are facing this year.

[DebtGoal]

Thanks for posting on this problem. Until now, little discussion has occurred regarding the cuts to 401(k) plans beyond the mere scaling back of matching contributions. My focus is primarily on the debt-laden, and this strangely can complement some good advice. Particularly, if one languishes in credit card debt and has been continuing to deposit into the 401(k), in most cases that should stop since the interest rates on credit cards usually exceed any returns on retirement accounts. Your thoughts?

Best,

DebtGoal

[poor boomer]

Just as I clicked on this post,the 401(k) subject came to a panel vote on Fox Business.

All four panelists voted "BUY" i.e. they recommend people invest now in their 401(k) plans.

Viewers can also weigh in (by TXT) and viewer opinion was 49% BUY, 23% SELL (don't invest, maybe divest), and 38% HOLD (basically, a "not sure" hedge vote).

So I think the prevailing sentiment is to continue investing and enjoy dollar-cost averaging stocks on sale.

[whk]

In response to DebtGoal,

401(k) contributions are pre-tax. This will increase your take home pay while also allowing you to contribute to your retirement. So contribute to your 401(k) and use the additional take home pay to reduce your credit card debt.